Governance and audit committees slide presentation

Governance and Audit Committees Dr AJ Purcell, FCPA , Chief Auditor, CPA Australia aj.purcell@cpaaustralia.com.au • CPA Australia is one of the world's largest accounting bodies with more than 150,000 finance, accounting and business professionals in 121 countries • Distinguishing feature of CPA Australia is ‘Business Strategy and Leadership’ • 35,000 members in Asia • 50 year presence in Asia • Staffed offices since 1992 • Hanoi and Ho Chi Minh City since mid 2007 Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 • Audit committees are an integral part of governance, and where used effectively can enhance governance • Part A  Governance;  relevance to business leaders; and  case study • Part B  Audit committees  what does and audit committee do?  effectiveness • Part C  Governance failures;  OECD principles;  code of ethics for accountants; and  CPA survey of Governance in Asia Pacific 2014 Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 PART A – The need for corporate governance • Agency and stewardship theory • Agency and agents act of behalf of the principals • Stewardship – carefully look after the resources they have been trusted with • Two assumptions of Agency Theory  Individuals act in their own self-interest  Agents are in a position of power • Berle and Means (1932) seminal work of the separation of rights and responsibilities of shareholders, directors and management • Principles of:  Due diligence  Executive compensation / incentives  Conflict of interest  Ethical practices • Corporate governance provides the context for:  Ownership and control  Exercise of power  Accountability and responsibility Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 Governance framework IFAC (2008) • Berle and Means (1932) - “control lies in the hands of individuals/groups who have actual power to select the board of directors” • Five controls:  Control through complete ownership  Majority control  Control through legal devices  Management control  Minority control Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 Explanation of Governance Principles • Financial aspects of corporate governance (Cadbury 1992) • OECD (2004) • Principles of Corporate Governance, the King Report on Corporate Governance (King 2002) • Principles of Corporate Governance and Best Practice Recommendations (ASX 2007) Justice Owen HIH Royal Commission (2003) • “Danger with an overly prescriptive approach to systems and structures is that it may unwittingly encourage a superficial or ‘tick the box’ approach to the achievement of governance objectives: • “Systems and structures can provide an environment conducive to good corporate governance … it is the acts or the omissions of people … that will determine whether governance objectives are in fact achieved” Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 Governance framework IFAC (2008) Anglo-American core duties and responsibilities from statute or case law • Avoid conflict of interest • Act in the best interest of the company • Exercise power for a proper purpose • Retain discretionary powers • Act with due skill and care • Be informed of the company’s operations • Prevent trading while insolvent Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 Conflict of interest • Bribery, secret commissions • Misuse of corporation’s funds for personal purposes • Accepting corporate opportunities • Confidential information to trade • Competing with the company • Misuse of position to secure a financial advantage • Act in the company’s interests  Action should always be in good faith, honestly and without collusion • Exercise power for a proper purpose  Act within power (ie Anti-competitive pricing would be illegal) • Duty to retain discretion  Directors remain responsible for power even if delegated • Duty of care, skill and diligence  Risks must not be reckless  Test of a reasonable man  Business judgement rule Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 Corporate Governance Lighthouse - reproduced with permission Auditor-General, New South Wales (2011) • Key messages:  Clear accountabilities and delegations  Organisational structure to add value  Sound risk management • The power of the metaphor of the lighthouse is to ensure that companies/directors/management:  identify and respect stakeholders’ needs and expectations;  are transparent, accountable, ethical Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 Governance framework IFAC (2008) Summary - Governance • Agency and stewardship theories to explain the psychology of governance • Alignment of interests • Corporate governance as the context for:  ownership/control  legitimate power  accountability and responsibility • Conformance and performance • Seminal works on governance (Cadbury, King, OECD, ASX) • Anglo-American core duties and responsibilities • Metaphor of the lighthouse Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 PART B – Audit committees • Audit committees can positively contribute to governance • Committees of the board – finance, nomination/remuneration Advisory committees – ethics, regulatory • “7 S” Theory  Strategy, structure, systems  Staffing, skills, style  Shared values • Behavioural focused  What are the enablers/disincentives to function? • Groups at the Audit Committee  Directors/independent directors/management  Auditors (external/interest) • Audit committees topical in the literature • Audit committees can be a vehicle to assist directors and management towards their mutual obligations of honest stewardship • Audit committees can assist companies to establish and maintain reliable systems of internal control Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 10 • In working with audit committees there can be negative and positive behaviours For example - government audit committee had:  Critical information withheld  Dominated members  Manipulation of agendas  Misinformation in relation to risk • Better practice guidelines – risk of prescription Effectiveness of and Audit Committee Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 11 To assess effectiveness, audit committees could consider the following: (1) quality of the financial reporting; (2) risk management and internal control; (3) compliance and ethics; (4) oversight of management and internal audit; (5) relationships with external auditors; (6) resources and investigations; (7) composition of the audit committee; (8) training; (9) frequency of meetings; and (10) role and responsibilities of the audit committee (Bromilow and Berlin, 2005) Some of the Building Blocks of Audit Committee Effectiveness Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 12 Audit Committees – Areas of Focus Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 13 Audit Committee Research • Independence, expertise and diligence • Skills and expertise • Support from management • Skill and training of audit committee members • Composition, authority and resources • Leadership • Adverse financial reporting • Mechanisms for monitoring financial reporting • Governance research predominately based on agency theory • Financial reporting, internal controls and sustainability • Audit committee mechanisms to strengthen corporate governance • Corporate law reforms aim to enhance accountability and integrity of financial reporting • Audit committee can enhance reporting and independence • Monitor and protect the interest of the community Do they add value and are they effective? • Recurring themes of:     accountability and transparency credibility of members independence advisory body • Behavioural nuances of the rigour of: debate, trust, effective communications, relationships Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 14 Challenges of an Audit Committee • Selection of the right things to • Appropriately skilled people • Managing relationships • Relevant questions • Management of the ‘difficult issues’ Doing the right things – focus on contributing to value • Charter:  Role of audit committee (power/duties)  Financial reporting  Appointment/oversight of external auditor and internal auditor (as applicable) • Financial reporting:  Annual and interim statements  Management accounts Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 15 • Appointment of auditors  Accountable to the board  Management of expectations  Audit and non-audit services  Communication lines  Audit fee  Shareholders informed of audit fees, non-audit services and how audit committee protects independence • Oversight of internal control and risk management • Other duties of audit committees Right people at the audit committee • Relevant skills • Management attitudes – agency –v- stewardship • Appointment of a chair  Skills : emotional intelligence (social awareness, empathy, selfawareness, self-management, relationship management) • Audit committee members  Skills/qualifications  Independence  Sufficient knowledge  Rigour / knowledge  Committed to integrity and transparency • Auditors – tell it like it is! Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 16 Relationship of the Audit Committee • Relationship with directors and independent members • External and internal auditors • Preparation / diligence • Work plan • Relationships with subsidiaries • Relationship with CEO/CFO critical Subject Matters • Financial reporting • Audit scope and objectives • Independence • Risk management and internal control • IT issues • Reputation • Key developments (service, infrastructure, performance) • Legal and regulatory issues Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 17 Difficult issues for an audit committee • Second opinions • Management engaged in misconduct/fraud • Errors in published accounts • Whistle-blowing allegations • Regulatory reviews • Major non-compliance with legislation • Fundamental internal control weakness • Replacement of auditors • Reprimanding management • Resistance • Incompetent members Summary • • • • • Provides oversight of internal controls and integrity of reporting Independence regime for auditors Facilitates communication Forum for disagreement Keeps the board informed of accounting and audit issues • Limitations of an audit committee  Expectations gap  Power to enforce recommendations  Credibility and undermining of effectiveness  Incompetency  Mistrust Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 18 PART B • • • • Governance Failures OECD Principles Code of Ethics for Accountants CPA (2014) Survey of Governance in the Asia/Pacific • GOVERNANCE FAILURES  Unethical and risk taking culture  Dominant and charismatic CEO  Boards which failed to question  Ineffective internal controls and risk management  Aggressive earnings management Enron – a catch phrase for a corporate collapse Cruver (2002) “Fear among competitors, suppliers, customers and even Enron’s employees…greed among those who dreamed of colossal bonuses, millions in stock options and generous campaign contributions Fear and greed…were radically and permanently entrenched…throughout the culture, the people and the industries that Enron touches” Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 19 • Financial crisis (GFC) – governance did act to safeguard against excessive risk taking • Information systems faulted • Strategy and performance metrics • Accounting and regulatory environments can lag • Remuneration systems/rewards not linked to strategy and risk appetite • Human factors  Abuse of power  Wicked conduct  Dysfunctionality  Unethical culture Improving corporate governance • Risk management • Risk appetite • Control environment OECD PRINCIPLES • Principles-based as compared to prescriptive • Unintended consequences of behaviours (what is the minimum I have to do?) • Six core principles of OECD  Basis for an effective governance system  Rights of shareholders  Equitable treatment  Stakeholders  Disclosure and transparency  Responsibilities of the board Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 20 Professional judgement + The framework of the Code requires the use of professional judgement Principles (judgement) Rules (compliance) Autonomy/privilege + responsibility + Professional accountants face dilemmas that require professional judgement • E.g.: The duty of confidentiality on one hand and disclosure of information to protect the public interest on the other • Dilemmas require consideration of which action creates the most good and least harm, best serves the rights of others and promotes the public interest + The impact of a potential action on our character and integrity is also important, as is the promotion of the credibility of the profession (required by the fundamental principle of professional behaviour in the Code) + These considerations are not independent of each other; need to be examined together Our code and principles + The first paragraph of the Code of Ethics for Professional Accountants states ‘A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest Therefore, a professional accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer’ + Fundamental principles • • • • • Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour The CPA Australia / CPA designation does not only signify competence and knowledge It also signifies integrity and the pursuit of the public interest Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 21 CPA (2014) SURVEY OF GOVERNANCE IN THE ASIA PACIFIC • Vietnam  Good governance was an enabler for economic growth  Corporate governance improves when accountability and financial transparency improves  Potential opportunities in relation to:  Integrity of financial reporting  Corporate reporting Summary of key findings as compared to other countries • Political interference – less of a problem in Vietnam • Accountability/transparency – more effective in Vietnam • Corruption and fraud Summary of presentation : Parts A/B/C • • • • • • • Governance Audit committees Corporate failures Behavioural factors – audit committees Codes of Ethics OECD principles Lastly – Governance Survey KEY TAKEAWAY Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 22 Corporate Governance Lighthouse - reproduced with permission Auditor-General, New South Wales (2011) Lớp học CNKT: số 01A-2015 Hà Nội, 17-18/09/2014 – số 01B-2015 Tp.HCM, 15-16/09/2014 23 ...• Audit committees are an integral part of governance, and where used effectively can enhance governance • Part A  Governance;  relevance to business leaders; and  case study • Part B  Audit. .. of auditors  Accountable to the board  Management of expectations  Audit and non -audit services  Communication lines  Audit fee  Shareholders informed of audit fees, non -audit services and. .. Corruption and fraud Summary of presentation : Parts A/B/C • • • • • • • Governance Audit committees Corporate failures Behavioural factors – audit committees Codes of Ethics OECD principles Lastly – Governance